WHOEVER BLINKS FIRST LOSES (WELL MAYBE)

I was reminded of above adage when reading recently about the contretemps between Tesco and Unilever about cost and payments. Tesco is the largest supermarket group in the United Kingdom. Unilever is one of the largest consumer brand companies in the world: with over four hundred brands and fifteen of them generating revenues over £1 billion annually. A clash of the titans, you might say.

Ostensibly the dispute was over cost. Unilever raised the price of its products by around ten per cent in response to a sharp decline in the value of sterling in September (largely caused by post-reaction to the decision of the UK as a result of the referendum on July to pull out of the European Union).

Unilever argued that the value of the pound had dropped by as much as nineteen per cent and they had no option but to recoup their potential losses because it was more expensive now to produce and import their products.

Unilever’s most popular brands include the following: Marmite, PG Tips tea, Colman’s Mustard, Dove, Bactolli Spreads, Comfort Fabric Conditioner, Hellmann’s Mayonnaise and Ben & Jerry’s ice cream: all of them in high demand and favoured by many shoppers in the UK market. In total it supplies over eight hundred products to Tesco. Consequently it can legitimately be described as being a supplier of major and strategic value to Tesco. To reinforce the importance of the Unilever brands research has shown that any one of its brands can be found in the kitchens and fridges of ninety-eight per cent of the UK’s households.

The media in the UK had tended to play down the adverse potential effects of a Brexit exit. The Unilever dispute brought the topic of a decline in the value of sterling to the fore. Widening out the discussion on this dispute to the impact arising from the impact of increasing inflation served to concentrate the minds of shoppers over the past few weeks.

I read the subsequent playing out of the dispute with interest as I feel it provides some interesting insights into the nature of retailer and supplier relationships which we discuss in detail in the text. In particular it highlights the feral nature of such relationships and reveals the psychology that is used by both suppliers and retailers when dealing with that most critical of all topics: pricing and costs. Let’s develop this further.

Prices rise and go down over a prolonged period of time. It is in the interest of retailers to protect their margin and hence profits. They do this by making decisions on what prices to charges and balancing that against their ability to manage margin. They could pass on the full increase to the shoppers or they could take a hit and absorb some of the increase. Indeed many retailers have to do this in order to avoid a sharp drop in sales and revenue.

Suppliers, when hit by cost increases (in this case as a result of the decline in sterling) have a couple of options. They can pass on the full extent of the price to the retailers or they can absorb part of the increase in the cost increase and hope to recoup it over time or cross-subsidise the loss from other brands in its portfolio.

It is difficult to be sure of what happened in the Tesco and Unilever dispute because we (and the media) are not privy to the exact increase that was demanded by Unilever or the increase in costs which they are experiencing as a consequence of the decline in sterling.

So what would happen if they were to hypothetically increase prices in this case by ten per cent? They would most likely face extensive negative publicity in the general and social media from shoppers and (unless competitors followed suit) would conceivably lose market share. It would be very unlikely that a retailer with the dominant position that Tesco holds, would pursue such a strategy.

Apart from the consequences in the preceding paragraph, it would be perceived as having caved in” to a dominant supplier and this would send wrong signals to all of the key stakeholders: shareholders, shoppers and the media. It would also signal that the power-dependency position very firmly rests in the hands of large suppliers.

To reinforce the dangers of total capitulation to suppliers; the “big four” supermarkets in the UK have focused on price decreases in the past couple of years. This is mainly due to strong and sustained competition from discount operators such as Aldi and Lidl and also to try and retain customers and encourage them not to defect to other competitors.

So what did happen?

The media (both general, social and business) portrayed the dispute as a “head-to-head” battle – based on the adage that “he who blinks first loses”. However in my view this is not an honest or accurate picture.

In fact the “sub-text” behind this battle was about reaching a compromise position with respect to the price increases. In all effective negotiations each party will start with a figure that they know cannot really be reached. Each party will also have an acceptable figure below which they will not go but will be prepared to coalesce around in order to achieve a degree of satisfaction.

In this case Tesco came out fighting through its public relations activity as “the people’s champion”. It removed a number of products (de-listed) from the shelves and the online channel – thereby signalling an aggressive “no holds barred” approach to Unilever. By leaking their decisions to the press they immediately captured the “moral high ground” in the eyes of shoppers. They also countered Unilever’s claims for a ten per cent increase by stating that many of the brands were produced in the UK and therefore were not exposed to the vagaries of currency fluctuations.

Arguably Tesco was also in a stronger position to do battle with a supplier such as Unilever by virtue of its size and scale of operations. Some of its struggling competitors would not have sufficient ammunition at their disposal to take on such a dispute.

Unilever was never going win the publicity argument. Any company that proposes increases automatically attracts the wrath of the majority of customer (many of whom do not, or do not want to understand the complexities of currency movements).

As well as some of its brands being produced in the UK, Unilever tends to allow its local country teams to make decisions on price – depending on the structure of the market in terms of competition and on customer affordability. This is somewhat at odds with the rather generic and “one size-fits-all” approach to passing on the price increases.

Share prices of both companies dropped in the immediate aftermath of the start of the dispute. Tesco’s shares dropped by three per cent and Unilever’s shares by 3.4 per cent.

 

After a few days, both sides came to an agreement on the issue of price increases. We again are not privy to the specific outcome: both sides clearly wishing to preserve confidentiality and a “loss of face”.

Rumours suggest that (not surprisingly) Unilever had to give way on the demand of a ten per cent increase. Tesco had to “bite the bullet” and also accept that a price increase of some sort was inevitable.

A cynic (such as me) would strongly argue that this was “much ado about nothing” in the context of it being portrayed as a “defender of the shopper” fighting against an oppressor.

The reality is that over the next couple of years, rising inflation will rise inexorably. Shoppers in general have been exposed to very low (almost negligible inflation for a number of years. Thus it could be argued that their expectation levels need to be changed to make them realise that price increases are and will be back on the agenda in the coming years.

Was this a cynical attempt to “groom” shoppers” to the inevitability of price rises? Yes in my view. What do you think?

In this case arguably the company that blinked first (it could have been either) did not lose.

So much for adages!

 

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